The sale of a £39.25m regional portfolio from one listed company to another may not seem particularly noteworthy, but behind the purchase of Quintain’s Sequel portfolio, which was approved by Palace Capital’s shareholders last week, there was more than met the eye.
For Quintain the sale represented a focusing of the business on London and a near exit from the regions, as well as a further step towards reducing its debt.
For Palace Capital it was the first significant purchase the company has made since industry veteran Neil Sinclair took the helm as chief executive in 2010.
Backed by the non-executive chairman, 11% shareholder and company registration entrepreneur Stanley Davis, the purchase is a return to the fore for Sinclair, following an acrimonious departure from Mission Capital in
February 2008. The company, which he founded with his daughter Emma, ousted the pair after a falling-out with shareholders Elliott Bernerd, Christopher Jonas and Robert Burrow that led to litigation. Allegations over misuse of £35,000 of company monies, countered by a claim for unfair dismissal, eventually led to a settlement out of court in July 2009.
Sinclair believes that his expertise and experience will enable him and investors to take advantage of high-yielding secondary property in regional markets and deliver strong returns.
Palace Capital has a market capitalisation of only £766,000. It raised the cash to buy the assets in a reverse takeover-style transaction and is already on the look-out for more opportunities.
The purchase can be seen as a litmus test for the success of investing in secondary markets in the regions, and suggests that there is an opportunity to establish new companies, with the right management, out of next to nothing.
“We knew we had to look for a significant transaction because we thought the regional market was going to turn as the country was entering into recovery,” recalls Sinclair. “We found this portfolio last November when Quintain was trying to sell it for £47m, which was too much money and they had effectively withdrawn it.
“We met with them in December, said we were interested, and quite rightly they said: ‘You have a market cap of £0.75m, this is £47m. Where are you going to get the money from?’”
Sinclair and Davis then went to see the lender to the portfolio, Nationwide, which was eager to reduce its exposure on the portfolio from a loan-to-value ratio of around 71% to 50%.
“We spoke to Nationwide, who said, if we bought it they would give us an amended facility … it was enhanced borrowing rates, they squeezed the testicles on fees and so on and so forth, but they saw that they would get around £17m paid back straight away if we could raise the remainder for the transaction on the stock market,” says Davis.
Summer solace A price was agreed with Quintain in March, although credit approval from Nationwide did not come through until July. As a result, Palace did not start capital raising until September, after the summer lull.
By this time Sinclair felt the market had already improved in its favour and the portfolio was valued in August at £44m. Among those that provided the £23.5m raised are Henderson Global Investors, which owns 10% of the company, and Axa Investment Managers, which holds 8%.
The focus will now be on providing them a return, including a 6% dividend, by reducing the 14% vacancy rate of the 24-asset portfolio, which is spread throughout the regions and comprises 48% offices, 34% industrial, 8% retail, 8% mixed use and 2% car parks.
“We get a 13% yield going in, and we are going to try and increase the income but also reduce the irrecoverable expenditures such as service charge shortfalls and empty rates. My view is that the owner-occupier market has two years to run while interest rates remain quite low,” says Sinclair.
Investors have urged the company to continue to seek more assets and grow and Sinclair and Davis are on the lookout. But at 70 and 75 respectively, do they still have the appetite to sink their teeth into something new?
How old is Irvine Sellar? He just built the Shard and he’s 76. Gerald Ronson is 74. They’ve still got the drive and the experience, and so have we,” Sinclair retorts. It seems in the gritty world of secondary markets, there is no substitute for experience.